POLICY/HEALTH PLANS: What’s the end game of all these premium rises?

I spent the last couple of days at an IFTF conference which looked at impediments to improving health and creating a better health care system–a small topic as you may have guessed. I’ll report a little more about the conference in due course but one of the most interesting talks was from Brad Kimler from Fidelity Investments, who laid out then projected future costs of health care, and the consequent impact on what a couple retiring at 65 would need to have saved to pay their premiums for Medicare and cover their out of pocket expenses. The number was $175,000! And if you are 45 now, you’ll need $650,000 by the time you’re 65. And neither of these included long term care. In fact for a retired couple with a good pension plan, and retiree insurance from their company, by 2015 80% of their income will be going to pay their health care premiums. There was a certain amount of shock and awe around the room. While Brad admitted some self-serving interest in getting people to save more (and have Fidelity manage that process), we still have an enormous challenge facing us as a society. Currently the average 401K account retiree at Fidelity has under $100,000 in it, and of course there are no real funds in dedicated health care retirement accounts yet.

What’s even more intriguing is that Brad based his calculations on an 8% increase in costs. Of course recently we’ve seen even bigger increases in costs. Hewitt Associates yesterday came out suggesting that employers will face premium increases of up to 14%. Unless we generate some amazing productivity miracle and get much richer very quickly, there are only two ways that this can go, as the baby boomers start moving into their 60s (starting next year). Either we start dropping more people into un- or underinsurance, or we add more people to something like the Medicare program. That of course that eventually means either higher taxes for working people or lower incomes for the people providing health care services and products.

From the THCB Sacramento office Matt Quinn, who wasn’t at the conference, seems to be thinking in similar ways:

    Hewitt Associates estimates that health insurers will seek 14% premium hikes from employer groups, but probably won’t get all of it. The survey notes that all of the major insurers surveyed seem to be "pricing rationally": they are reflecting increases in medical costs as increases in premiums. And – at least before they get into negotiations with large employers – none of them seems to be playing the "take a loss / make it up on volume" ponzi scheme of the past. What the survey doesn’t note, however, is how much of these premium increases employers will pass onto their employees (or how many employers will simply drop coverage for some or all employees).

    So that leaves us with the current state of affairs: Employers (purchasers) expect to pay double digit premium increases each year, but can only "afford" single digit increases. Health insurers expect that their medical costs will increase at a double digit clip each year – and faster when the baby boomers hit. Hospital and drug costs are rapidly increasing, while almost all physicians expect – and most non-primary care physicians are receiving – annual pay raises. And consumers continue to want the "best" (i.e. newest and most heavily advertised) care at low or no cost.

    The recent CalPERS showdown with Sutter (and other "expensive" hospitals) illustrates the growingly activist role of purchasers in managing costs, but their efforts are clearly not stemming the tide. And, as we have seen at GE, SBC, and Safeway, employee tolerance for healthcare cost increases is quite low.

    I think that only one question remains: Who – other than the federal government – has the market clout to manage the cost and quality of care?

Several of the representatives from large employers at the meeting yesterday were starting to mouth the same opinion. Don’t expect anything big to happen with this Administration or Congress, so realistically even with a Kerry presidency this won’t be on the front burner till 2008-12. But absent a 1990s type productivity boom, this question is not going away.

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